Lawsuits can be expensive and inconvenient, but employee litigation can be even more painful for companies, executives and managers.
Employee lawsuits hamper morale and could encourage other employees to follow with their own lawsuits. This kind of litigation can also make information public that companies would rather keep private. Additionally, such litigation can generate nasty public relations.
Fortunately, employers can minimize many employee lawsuits and their fallout through arbitration agreements, where a neutral arbitrator instead of a court hears the facts of the dispute and makes a binding ruling. A study by Alexander Colvin of Cornell University found that employers win more often in arbitration than in litigation, employee awards are fewer and the proceedings move much faster.
But not all arbitration agreements are created equal. In fact, courts frequently throw out agreements that judges decide are too flawed or too heavily biased in favor of employers. Employers need to understand the limits of arbitration agreements, as well as the pros and cons, in order to determine if arbitration agreements are appropriate for their business.
The ABCs of Arbitration Agreements
Arbitration is a form of alternative dispute resolution, where two sides look outside the court system to resolve a conflict. In arbitration, an impartial arbitrator listens to claims, facts and testimony from both sides and then issues a decision.
By signing arbitration agreements, employees typically waive their right to file lawsuits when they have a dispute with their employers. However, the obligation to arbitrate can vary. Some employers require all disputes to go to arbitration, while others designate only certain issues.
“Binding” arbitration is most frequently used in employment agreements, where both sides agree ahead of time that the arbitrator’s decision will be final — with very limited bases to appeal.
However, an arbitration agreement alone does not mean that employers can never be sued over an employment issue. State and federal regulators can still sue employers when employees file complaints against companies for violating discrimination, pay or other laws.
In addition, the National Labor Relations Board (NLRB), which enforces federal labor law, has refused to uphold a number of arbitration agreements in the past several years, even though the federal courts have consistently rejected the NLRB’s arguments.
Once employees or former employees decide to enter into arbitration agreements, there are three basic steps in the proceeding: prehearing briefs, the hearing and the arbitrator’s decision.
The prehearing briefs allow the company and the employee to present their views and describe their evidence to the arbitrator. During the hearing, each side presents its case to the arbitrator, which can include calling witnesses. The arbitrator then makes a decision.
The Pros and Cons of Arbitration Agreements
While arbitration agreements offer many advantages, they do include some significant downsides. Employers should weigh the pros and cons to determine if arbitration agreements make sense for their company. Among the pluses:
- Cheaper and faster: Litigation can drag on for years and cost vast sums of money, with single-plaintiff discrimination lawsuits often costing over $100,000 to defend. Arbitration is generally far less expensive. In some cases, arbitration costs are as low as a third of the costs for a federal lawsuit or even lower. In addition, arbitration usually proceeds must faster than lawsuits.
- Class action waivers: Another great benefit of arbitration agreements is the ability to include class action waivers, wherein the employee and the employer agree that any disputes will be resolved in individual arbitration. This can be extremely helpful in preventing costly class action wage and hour or discrimination cases that can drag on for years and result in high levels of exposure.
- Greater confidentiality: Court records are usually public, and controversial or high-profile court cases can garner a lot of publicity — most of it negative for employers. In addition, plaintiffs’ attorneys have been increasingly turning to the media as a weapon, especially in discrimination or other inflammatory cases. Unlike jury trials, arbitration hearings are not public and typically provide a greater level of privacy for both sides.
- Informality: Appearing in court can be intimidating for employers and employees alike, and the rules can seem archaic and illogical to non-lawyers. Arbitration hearings tend to be less formal than courtroom appearances. Hearings may take place in a conference room rather than a courthouse, and arbitrations are often more flexible about working around participants’ schedules.
- More predictable process: Juries are notoriously unpredictable and prone to emotional decisions. In arbitration, that unpredictability is minimized. Instead, it is largely replaced by a trained professional who should easily grasp the issues involved.
Along with the advantages, arbitration agreements can have negative consequences that employers should understand. The downsides to arbitration include:
- Employees may resent the agreements: While arbitration may be made a mandatory condition of employment, most people balk at signing employment arbitration agreements, according to a survey by Lake Research Partners. The majority of people (59%) oppose “forced arbitration clauses in the fine print of employment and consumer contracts,” the study reported.
- Confusion over arbitration: The survey also found that many people were unclear on the provisions of arbitration agreements. Nearly three-quarter of respondents kept the right to sue their employer if they were seriously injured or had a major work dispute, even if they signed a binding arbitration agreement. Less than a third remembered reading about arbitration in their employment contracts.
Employees who can claim they did not understand an arbitration agreement may try to contest its validity in court.
- Less discovery: Arbitration also typically allows less discovery or information that each side can get from the other. While discovery can be lengthy and often adds a huge amount to the cost of a typical lawsuit, the lack of this kind of information can — in some circumstances — hurt both sides in an arbitration proceeding.
- Inability to appeal: For all its flaws, the judicial system operates within a clear set of rules and precedents, and litigants can appeal when they feel a court ruling is unfair. Arbitrators don’t operate within this same framework and most arbitration rulings cannot be appealed. So if either side is unhappy with the arbitrator’s ruling, there is little recourse.